How clients think – a review of the book ‘Nudge’ in relation to financial planning
How often do we stop to think about how our clients think? Dan Atkinson, senior technical consultant with EQ Investors, reviews Nudge: Improving decisions about health, wealth and happiness by Richard Thaler and Professor Carl Sunstein
As a technical consultant/paraplanner, my job involves using the written word to explain, persuade and influence the decisions that clients make. Financial planners combine this with verbal communication and persuasion. We want to present the facts without bias and even-handedly so as not to coerce clients into a particular course of action. We would like clients to follow the logic presented and come to the same conclusion that we are recommending. But how often do we stop to think about how our clients think?
I read this book before the EU Referendum, but I think that what we have seen in terms of investor behaviour from some areas highlights the need for planners to have an element of psychological understanding. Understanding how people really think as opposed to how they would like to think they think will enable us to better counsel clients to avoid poor decisions.
Professor Richard Thaler and Professor Carl Sunstein initially help us understand the difference between the mystical Econs (who always make rational decisions and behave predictably) and Humans (who don’t!). Once we realise that very few people are truly rational ‘Econs’ we come to understand that the way we perceive the world is somewhat skewed.
Those of you who have read Daniel Kahneman’s book Thinking, Fast and Slow will know that there are effectively two ‘systems’ at work when we make decisions. An ‘automatic’ system that responds quickly based on rules of thumb (but is prone to get things wrong), and a ‘reflective’ system that weighs things up over a longer period of time (but isn’t much use if a bus is driving towards you at speed). For those of us who are not Econs, we are subject to various biases and flaws in both systems.
“There is a place for helping people improve their outcomes with gentle shepherding”
If you understand how people think, you can control what they do. Clearly this can be wielded for great evil, but Thaler and Sunstein propose using this to help people make better decisions for themselves. State intervention is a risky and somewhat unpalatable idea for the ‘free world’, but there is a place for helping people improve their outcomes with gentle shepherding.
The term that Thaler and Sunstein use is Libertarian Paternalism, which they feel guides people to good outcomes, but doesn’t cut off the ability to make your own decisions (and mistakes). Gentle nudges in the right direction are unobtrusive and help those who don’t want to engage. They are not subversive pushes forced on people; they are a carefully designed ‘Choice Architecture’ based around the mnemonic ‘NUDGE’.
Structure complex choices
The theory is interesting in its own right, but this book looks at how these techniques can be used in the real world. These are grouped into examples affecting money and those affecting society. Some of these ideas are already being used in the States, here in the UK and on a global scale.
The more you read, the more you become aware of how this benevolent manipulation is taking place. For example, we have an examination of Auto Enrolment (remember this book was first published in 2008 prior to the Credit Crunch) and automatic increases to pension savings could help bring savings rates up to the level that is needed. Those of you who have signed up as organ donors in the UK recently will have been encouraged to share this with their friends on Facebook.
So why should financial planners and paraplanners read this book? We are in the business of helping people make the best decisions. We work with some amazing people who are focused on what they do, be that running a company, raising a family, or building homes. This can leave less mental space (or indeed time) to devote to teasing out and weighing up options. We are being paid to recommend the best course of action and help them to implement this. If we make the process of understanding our recommendations difficult we are not going to achieve anything other than fatigue (for our clients and for us).
“By gaining an appreciation of how people think and make decisions
we can make our communications easier to understand”
Reading this book won’t make you a master communicator. It won’t help you manipulate your way to the top, or solve every problem that comes your way. However, by gaining an appreciation of how people think and make decisions we can make our communications easier to understand. This in turn will help our clients to make the decisions that could lead to them achieving their planning objectives, quicker, more efficiently, or with less risk.
For those of you involved in employee benefits there are some excellent insights about how to improve employee engagement levels. There are some practical real life examples that show that these theories do work. By considering how you construct opt out/in benefit packages – and how you explain them – you can have an excellent influence. You will also be able to help employers to understand why their employees are not taking full advantage and provide insight into reversing this.
This is a relatively easy read and is designed to be really practical. Thaler and Sunstein want ordinary people (and I assume they mean Financial Planners and Paraplanners) to grasp these concepts and be able to use them for the greater good. These techniques are being used in the UK and we should be aware of them. David Halpern, head of Number 10’s Behavioural Insights Team (the Nudge Unit), has written a book talking about how his team have been doing this to save millions of pounds of tax payers money simply by helping us make better decisions; I’m really looking forward to reading it.
If you find that this book doesn’t quite quench your thirst for the academic, there are plenty of references to other writings throughout. Thinking, Fast and Slow by Daniel Kahneman would be a natural follow on for someone looking to understand the detail. It is a much slower read and requires much more mental involvement as you contemplate the content.
Visit the EQ Investors website